G20 Fossil-Fuel Subsidy Phase Out: A review of current gaps and needed changes to achieve success

In its September 2009 Communiqué from Pittsburgh, the G20 nations (“Group of Twenty” nations that include the largest economies in the world) committed to “rationalize and phase out over the medium term inefficient fossil fuel subsidies that encourage wasteful consumption.”

The G20 commitment was a positive step in reforming policies that subsidize the oil, gas and coal industries at a time when the world is concurrently trying to scale back emissions that contribute to climate change. This brief highlights a variety of issues that illustrate immediate and future challenges with making the phase out work. The authors evaluated the reporting and reform efforts of the G20, using official documents that were submitted by the members. The purpose of this evaluation was to assess the coverage of existing reporting, identify patterns in arguments countries put forth to exclude policies from reform, and discuss options to increase the chance of the reform effort being successful. The brief’s key findings include:

No country has initiated a subsidy reform specifically in response to the G20, and some of the reported (pre-existing) reforms are at an early stage of consideration and may not be fully implemented.

G20 reporting of fossil fuel subsidies remains spotty. Of the 20 member countries, eight stated that they have no fossil-fuel subsidies at all subject to phase out, of which two (United Kingdom and Japan) provided no information at all. Only one of the twelve countries (the United States) reported more than ten subsidies subject to reform. Three countries discussed energy subsidies in a general sense without listing any specific subsidy policies (Indonesia, Russia, and Mexico).

Comparisons with third party studies of consumer and producer subsidies found that some of the countries reporting very little in the way of subsidies to the G20 had tens of billions in subsidies in the other assessments.

Common reasons members give for excluding subsidies from reform efforts often break down under scrutiny. These include subsidizing fuels with a lower carbon content than what is being replaced; assuming specific programs are part of the tax “baseline” rather than targeted subsidies; supporting objectives such as job creation or rural development that are deemed more important than subsidy reform; arguing that even with the subsidies, the prices are still higher than the reference price and therefore don’t distort behavior; and asserting that so long as the domestic price is higher than production costs, no subsidy exists. Country arguments require careful evaluation to ensure alternatives with lower environmental and fiscal costs are properly compared, and that similar issues are dealt with in similar ways across the G20.

A number of structural reforms would increase the likelihood of the phase out being successful. These include:

Separating reporting from reform.

Establishing an oversight and review board for reporting to review submittals for accuracy and coverage, with the ability to go back to member to fill in gaps.

Standardizing the submittal process for subsidy information as well as requiring standardized reporting of the claimed justifications for keeping particular subsidies outside the purview of the G20 phase out.

Initiating discussion and research on an appropriate secretariat to oversee reform efforts.

Fossil fuel subsidy reform makes sense from the standpoints of both fiscal management and environmental protection. In this brief, we have evaluated the specific progress and technical issues surrounding the G20 effort. Ultimately though, the barriers to successfully reforming and eliminating fossil fuel subsidies are not just technical, but are political as well. Overcoming these political challenges will require dedication by G20 leaders, if they are to fulfill their pledge and successfully reform and eliminate fossil fuel subsidies.